Seller Financing: Is it a Good Idea?

In the tight market of business selling, seller financing gives business owners a chance to sell quickly. But seller financing isn’t for everyone. To know if seller financing is a good choice for you, take a look at these tips.

Today’s business owners often get many lookers into their business for sale but few actually make an offer.

Usually, a lack of offers isn’t the fault of your business, but the buyers’ lack of financing options. This leaves business sellers with two options: reduce the asking price or overcome financing issues by offering seller financing.

Instead of losing potential buyers, some business owners are opting to finance the business sale themselves. This decision is risky, but under the right circumstances it can also be financially beneficial. If seller financing seems like a viable option, don’t take the leap until you read this list of tips on seller financing.

Risk Assessment

Selling a business for cash is relatively risk-free for the seller. After closing, the seller will walk away from the deal with cash in hand. If the business owner finances the sale, he is connected to the business for several years after closing. If the new business owner is successful, the new owner pays the seller with interest and everyone wins. But if the new owner is unable to make a profit, the seller could incur additional expenses in an attempt to collect the debt and may also lose the interest income.

Like all investments, seller financing comes with a certain amount of risk. If you are at ease with investing in the new owner of your business, then seller financing might be the right decision.

Leveraging the Benefits

Many business owners view seller financing as a last-ditch effort to sell the business quickly when they should see it as a way to enhance the profits of the sale.

From the start, seller financing increases the final selling price of the business. Seller financed deals typically result in a 15% increase over the cash price. That means seller financing makes a great bargaining tool when negotiating the terms of the sale.

Another benefit of seller financing is the ability to multiply the profit with interest payments. Seller financing provides a higher rate of return than most investment vehicles.

Advertise Seller Financing

Some sellers hesitate to offer a seller financing option up front because they aren’t totally sure about it and use an offer to finance only if they get pressured during negotiations.

If you aren’t completely comfortable with seller financing, then don’t offer it, not even as a last resort. But if you are comfortable with seller financing, advertise it as a selling point in your marketing strategy.

Down Payment

Asking for a substantial down payment equalizes the risk between buyer and seller.

If you choose to finance the sale of your business, don’t be afraid to ask for a down payment that is no less than one-third of the sale price. Asking for two-thirds of the selling price as a down payment is not unreasonable. Remember, the more you finance, the bigger your risk.

Don’t Do it Alone

Just because you choose to finance the sale of your business, does not mean you have to handle the selling process by yourself.

A loan between buyer and seller calls for many variations in structure, which require professional input in order to secure collateral, devise proper loan terms and obtain adequate insurance terms. Before agreeing to seller financing, obtain advice from legal and financial professionals.

Avoiding Pressure

Many times, business sellers feel pressured into a seller financing deal. No matter how quickly you want to sell, choosing seller financing for the purpose of a quick sale is a huge mistake. If a buyer pressures you too hard for seller financing, it’s time to step back. If you aren’t at ease with financing that buyer, walk away from the deal and wait for a better prospective buyer to come along.